Subba Rao, J.
1. This appeal by special leave is preferred against the order of the MadrasHigh Court in a reference made to it by the Income-tax Appellate Tribunal unders. 66(1) of the Income-tax Act, 1922, hereinafter called the Act.
2. The facts leading up to the reference and relevant to the present enquiryare as follows. The Free Press of India (Madras) Ltd., hereinafter called theFree Press Company, was a private limited company carrying on business asprinters and publishers of certain newspapers, namely, 'IndianExpress', 'Dhinamani' and 'Andhra Prabha' at Madras,'Eastern Express' and 'Bharat' at Calcutta and 'SundayStandard' and 'Morning Standard' at Bombay. On August 31, 1946,the Free Press Company passed a resolution transferring to the ExpressNewspapers Limited, a new company formed on or about April 22, 1946,hereinafter called the assessee-company, the right to print and publish thesaid newspapers from September 1, 1946, letting out its machinery and assetsand authorizing the assessee-company to collect the book debts and pay off theliabilities of the Free Press Company. The assessee-company accordingly startedpublishing newspapers from September 1, 1946. On October 31, 1946, the FreePress Company resolved at a General Body meeting to wind up the companyvoluntarily. The liquidator appointed thereunder was directed not to carry onthe business of the company. On November 1, 1946, the liquidator ascertainedthe value of the assets over the liabilities taken over by the assessee-companyas per the balance-sheet at Rs. 19,36,000/- and this amount was credited to theaccount of the two directors of the Free Press Company in the assessee's books.The profit of the Free Press Company was worked out to be Rs. 6,08,666, beingthe difference between the written down value and the sale price of themachinery. That sum was made up of, (i) the difference between the originalcost price and the written down price of the machinery....' Rs. 2,14,090/-,(ii) the amount in excess over the original cost price.... Rs. 3,94,576/-. TheIncome-tax Officer included the said two items in the total income of theassessee-company under the following heads, (i) profit under proviso to s.10(2)(vii) ..... Rs. 2,14,090/- and (ii) capital gains under s. 12B ..... Rs.3,94,576/-, and assessed each to tax. The Income-tax Appellate Tribunal upheldthe validity of the inclusion of the item under capital gains in the totalincome of the assessee but decided against the inclusion of the first item. TheAppellate Tribunal referred the following two questions, among others, for thedecision of the High Court of Madras under s. 66(1) of the Income-tax Act :-
'4. Whether Free Press Company made a businessprofit of Rs. 2,14,090/- under the proviso to section 10(2)(vii) of the Act?'
'6. Whether the capital gain made by the Free PressCompany is liable to be assessed in the hands of the Express Company, undersection 26(2) of the Act ?'
3. The reference was heard by a Division Bench of the High Court, consistingof Rajagopalan and Ramchandra Iyer, JJ., who by their judgment answered the twoquestions in the negative and against the department. The present appeal is preferredagainst the said judgment of the High Court.
4. The argument in the appeal proceeded on the basis of the following facts.During the accounting year 1946-47 the Free Press Company did not do thebusiness of printing and publishing newspapers from September 1, 1946, andthereafter the assessee-company alone was carrying on the said business. TheFree Press Company went into voluntary liquidation on October 31, 1946, andliquidator, on November 1, 1946, confirmed the transfer of the assets made by theFree Press Company to the assessee-company. Therefore, on November 1, 1946, theaforesaid machinery was sold yielding a profit of Rs. 6,08,666/- to the FreePress Company being the difference between the written down value and the saleprice of the machinery. Broadly stated, the machinery was sold by the FreePress Company during the accounting year after it closed down its business andafter it went into voluntary liquidation. On those facts learned counsel forthe Revenue raised before us the following two contentions : (1) The first itemof Rs. 2,14,090/-, representing the surplus over the written down value of themachinery was assessable in accordance with the proviso to s. 10(2)(vii) of theAct; and (2) the second item of Rs. 3,94,576/-, representing the capital gainsmade by the Free Press Company is assessable in the hands of theassessee-company, who succeeded to the said business, under s. 26(2) of theAct.
5. Learned counsel for the respondent contended that neither the conditionslaid down in s. 10(2)(vii) of the Act nor those laid down in s. 26(2) thereofattracted the said two items of income and, therefore, they were not assessablein the hands of the assessee-company.
6. The first question turns upon the relevant provisions of s. 10 of theAct. To have a clear view of the scope of the relevant provisions it will beconvenient to read them at one place.
7. Section 10. - (1) The tax shall be payable by an assessee under the head'Profit and gains of business, profession or vocation' in respect ofthe profits and gains of any business, profession or vocation carried on byhim.
(2) Such profits or gains shall be computed after making the followingallowances, namely :-
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(iv) in respect of insuranceagainst risk of damage or destruction of buildings, machinery, plant,furniture, stocks or stores, used for the purposes of the business, professionor vocation, the amount of any premium paid;
(v) in respect of current repairsto such buildings, machinery, plant or furniture, the amount paid on accountthereof;
(vii) in respect of any suchbuilding, machinery or plant which has been sold or discarded or demolished ordestroyed, the amount by which the written down value thereof exceeds theamount for which the building, machinery or plant, as the case may be, is actuallysold or its scrap value :
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Provided further that where theamount for which any such building, machinery or plant is sold, whether duringthe continuance of the business or after the cessation thereof, exceeds thewritten down value, so much of the excess as does not exceed the differencebetween the original cost and the written down value shall be deemed to beprofits of the previous year in which the sale took place :
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8. We are concerned with the second proviso to s. 10(2)(vii) of the Act. Thesubstantive clause grants a balancing allowance in respect of building,machinery or plant which has been sold or discarded or demolished or destroyed.The allowance represents the excess of the written down value over the saleprice. Under the proviso, if the sale price exceeds the written-down value, butdoes not exceed the original cost price, the difference between the originalcost and the written down value shall be deemed to be profits of the yearprevious to that in which the sale takes place; that is to say, the differencebetween the price fetched at the sale and the written down value is deemed tobe the escaped profits for which the assessee is made liable to tax. As thesale price is higher than the written down value, the difference represents theexcess depreciation mistakenly granted to the assessee. To illustrate : assumethat the original cost of a machinery or plant is Rs. 100/- and depreciationallowed is Rs. 25/-; the written down value is Rs. 75. If the machinery is soldfor Rs. 100/-, it is obvious that depreciation of Rs. 25/- was wrongly allowed.If it had not been allowed that amount would have swelled the profits to thatextent. When it is found that it was wrongly allowed that profit is brought tocharge. The second proviso, therefore, in substance, brings to charge anescaped profit or gain of the business carried on by the assessee. The scope ofthis proviso cannot be ascertained in vacuum. The conditions for itsapplicability can be ascertained only in its relation to the other relatedprovisions. Under s. 3 of the Act income-tax shall be charged for any year inaccordance with and subject to the provisions of the Act in respect of thetotal income of the previous year of every assessee; under s. 6, one of theheads of taxable income is 'profits and gains of business, profession orvocation'; under s. 10(1), the tax under that head is payable in respectof profit or gains of any business carried on by the assessee during theaccounting year. The main condition which attracts all the other sub-sectionsand clauses of the section is that the tax shall be payable by an assessee inrespect of the profit or gains of business, etc., carried on by him. Thecrucial words are 'business carried on by him'. If the profit orgains were not earned when the business was being carried on by the assesseeduring the accounting year, they would fall outside the provision of s. 10(1).For instance, if the machinery sold after the business was closed or when thebusiness was under liquidation, it would not be appropriate to hold that theprofit or gains earned by the sale were in respect of the business that wasbeing carried on by the assessee. The second condition that attracts the secondproviso is implicit in the adjective 'such' preceding 'building,machinery or plant' sold. The adjective 'such' refers back tocls. (iv), (v), (vi) and (vii) of s. 10(2). Under clause (iv) an allowance isallowed in regard to any premium paid in respect of insurance against risk ofdamage or destruction of buildings, machinery, plant, etc. used for the purposeof the business, profession or vocation. Under this clause allowance is allowedonly in respect of the machinery used for the purpose of the business. Clauses(v), (vi) and (vii) refer to such buildings, machinery, plant, etc.; that is tosay, such buildings, machinery, plant etc., used for the purpose of thebusiness. The result is that the second proviso will only apply to the sale ofsuch machinery which was used for the purpose of the business during theaccounting year. It brings in to charge the escaped profits under the guise ofsuperfluous allowances if the machinery sold was used for the business duringthe accounting year when the business was being carried on. Therefore, to bringthe sale proceeds to charge the following conditions shall be fulfilled : (1)During the entire previous year or a part of it the business shall have beencarried on by the assessee; (2) the machinery shall have been used in thebusiness; and (3) the machinery shall have been sold when the business wasbeing carried on and not for the purpose of closing it down or winding it up.If these were the conditions for the applicability of the said proviso, thesale of the machinery in the instant case having taken place after the businesswas closed and during the winding up proceedings, it would fall outside thescope of the said proviso and therefore the first item is not assessable totax.
9. This point directly arose for consideration in The Liquidators of PursaLimited v. Commissioner of Income-tax, Bihar : [1954]25ITR265(SC) . There, theassessee-company carried on the business of growing sugarcane and manufacturingand selling sugar. In the year 1943 it negotiated for the sale of the factoryand other assets with the object of winding up the company. It received a firmoffer on August 9, 1943, and concluded the agreement of sale on December 7,1943. Between August 9, 1943, and December 7, 1943, it never used the machineryand plant for the purpose of manufacturing sugar or for any other purposeexcept that of keeping them in trim and running order. In the assessment of thecompany to income-tax for accounting period from October 1, 1943, to September30, 1944, the income-tax authorities treated the surplus made by the company onthe sale of the buildings, plant and machinery as profits under proviso (2) tos. 10(2)(vii) of the Act. This Court held that the said amount was not taxable.This Court rejected the contention of the Revenue that the said excess wastaxable on two grounds, namely, (1) 'the sale of the machinery and plantwas not an operation in furtherance of the business carried on by the companybut was a realisation of its assets in the process of gradual winging up of itsbusiness which eventually culminated in the voluntary liquidation of thecompany; (2) 'even if the sale of the stock of sugar be regarded ascarrying on of business by the company and not a realisation of its assets witha view to winding up, the machinery or plant not being used in the accountingyear at all and in any event not having had connection with the carrying on ofthat limited business during the accounting year, s. 10(2)(vii) could have noapplication to the sale of any such machinery or plant'. Learned counselfor the Revenue contends that the main reason for the decision was that themachinery or the plant was not used in the accounting year for the business andthat the second reason, namely, that the assets were sold in the process ofgradual winding up of the company was only an observation and that the decisionwas not based upon the said observation. But a careful perusal of the judgmentdiscloses beyond any reasonable doubt that the decision was based upon both thegrounds. As in the present case the machinery was sold not for the business butonly for closing it during the liquidation proceedings, this decision directlycovers the present case. This question again fell to be considered by thisCourt in The Commissioner of Income-tax, Bombay Circle II v. The NationalSyndicate, Bombay : [1961]41ITR225(SC) . There, the National Syndicate, aBombay firm, acquired on January 11, 1945, tailoring business as a goingconcern for Rs. 89,321/- which included the consideration paid for sewingmachines and a motor lorry. Soon after the purchase the respondent found itdifficult to continue the business, and therefore it closed its business inAugust, 1945. Between August 16, 1945, and February 14, 1946, sewing machines andthe motor lorry were sold at a loss. The respondent closed its account books onFebruary 28, 1946, showing the two losses and writing them off. For theassessment year 1946-47, the respondent claimed a deduction under s. 10(2)(vii)of the Indian Income-tax Act. The question fell to be considered on aconstruction of the provisions of s. 10(2)(vii) of the Act. This Court,speaking through Hidayatullah J., held that the loss was a business loss,though the machines and the motor lorry were sold after the business was closeddown, as the said machines and lorry were used for the purpose of the businessduring a part of the accounting year and were sold during the accounting year.This Court, after noticing the decision under appeal and that of this Court in Liquidatorsof Pursa Limited v. Commissioner of Income-tax, Bihar : [1954]25ITR265(SC) , andthe amendment introduced in the second proviso to s. 10(2)(vii) of the Act,observed :
'But it is to be noticed that no such amendment wasmade in clause (vii) to exclude loss over buildings, machinery or plant afterthe closure of the business. It is thus clear that the principles which governthe proviso cannot be used to govern the main clause, because profit or lossarise in different ways in business. The two rulings do not, therefore, applyto the facts here.'
10. It is contended that the principle accepted by this decision is inconflict with that laid down in the case of The Liquidators of Pursa Limited : [1954]25ITR265(SC) . It is said that the condition that the sale of themachinery at a loss should have been before the closing of the business isimpliedly laid down by s. 10(1) of the Act which applies equally to clause(vii) as well as to the second proviso thereto, and that if the condition neednot be fulfilled in the case falling under the substantive part of clause (vii)of s. 10(2) of the Act, it will be incongruous to apply it to a case fallingunder the second proviso before it was amended. So stated there is someplausibility in the argument. But this Court in express terms made adistinction between the scope of the substantive part of clause (vii) and thatof the second proviso thereto and expressly distinguished those rulings on theground that they would not apply to the construction of the substantive part ofclause (vii). When this Court expressly confined the scope of the decision tothe substantive part of clause (vii) without disturbing the validity of thedecisions governing the second proviso, it is not proper that we should relyupon it in preference to a direct decision on the second proviso to clause(vii) of s. 10(2) of the Act before it was amended. This Court in K. M. S.Reddy, Commissioner of Income-tax v. Kerala v. The West Coast Chemicals andIndustries Ltd. (in liquidation), Alleppy 1962 Supp. 3 S.C.R. 960 heldthat a winding up sale was not trading or doing business. There, chemicals andother raw-materials were sold not in the course of ordinary trading but only inrealisation sale after the company had been wound up. This Court, speakingthrough Hidayatullah J., posed the following question :
'The question, therefore, is whether there can besaid to be a sale in the carrying on of the business in respect of thechemicals and other raw materials.'
11. After referring to the passages in Halsbury's Laws of England, 3rd Edn.,Vol. 20, pp. 115-117, wherein it was stated that 'mere realisation ofassets is not trading' and that there was distinction between salesforming part of the trading activities and those where the realisation was notan act of trading, the learned Judge observed that the said distinction was asound one. The learned Judge, on a consideration of other decisions, alsoaccepted as correct the distinction made between a sale of the entire stock aspart of trading and the sale of a part of the stock as a winding up sale. Thenthe learned Judge applied the principles to the facts of the case and held thatit was impossible to infer that the chemicals and raw materials were sold inthe ordinary way of business or that the assessee company was carrying on atrading business. This decision again accepts the distinction between a saleheld in the ordinary way of business and that held for the purpose of windingup the business and that in the latter case the profits accrued are not tradingprofits. This case no doubt did not turn upon the provisions of the secondproviso to clause (vii) of s. 10(2) of the Act, but the principle acceptedtherein is the basis for the application of s. 10 of the Act and that willapply to all provisions of s. 10, unless an exception is made in a particularprovision. For the foregoing reasons we hold that the first item is not liableto tax and the High Court has given the correct answer to the first questionsubmitted to it.
12. The second item relates to capital gains. That represents the excess ofthe price obtained on the sale of the machinery over its original cost price.It is conceded that it does not represent profits and gains of business, but itfalls under the heading 'capital gains'. But it is argued that, asthe Free Press Company was wound up and, therefore, could not be found, theassessee, who had succeeded to it, would be liable to be assessed for the saidcapital gains under the proviso to s. 26(2) of the Act. To appreciate thecontention some of the relevant provisions of the Act may be read :
13. Section 6. - Save as otherwise provided by this Act, the following headsof income, profits and gains, shall be chargeable to income-tax in the mannerhereinafter appearing, namely :-
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(v) Profits and gains ofbusiness, profession or vocation.
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(vi) Capital gains.
14. Section 10. - (1) The tax shall be payable by an assessee under the head'Profits and gains of business, profession or vocation' in respect ofthe profit and gains of any business, profession or vocation carried on by him.
15. (2) Such profits or gains shall be computed after making the followingallowances, namely :-
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16. Section 12B. - (1) The tax shall be payable by an assessee under thehead 'Capital gains' in respect of any profits or gains arising fromthe sale, exchange, relinquishment or transfer of a capital asset effectedafter the 31st day of March, 1956, and such profits and gains shall be deemedto be income of the previous year in which the sale, exchange, relinquishmentor transfer took place :
Section 24. - (2A) Notwithstanding anything contained insub-section (1), where the loss sustained is a loss falling under the head'Capital gains', such loss shall not be set off except against anyprofits and gains falling under that head.
17. (2B) Where an assessee sustains a loss such as is referred to insub-section (2A) and the loss cannot be wholly set off in accordance with theprovisions of that sub-section, the portion not so set off shall be carriedforward to the following year and set off against capital gains for that year,and if it cannot be so set off, the amount thereof not so set off shall becarried forward to the following year and so on, so however that no such lossshall be carried forward for more than eight years :
Provided that where the loss sustained by an assessee,not being a company, in any previous year does not exceed five thousand rupees,it shall not be carried forward.
18. Section 26. - (2) Where a person carrying on any business, profession orvocation has been succeeded in such capacity by another person, such person andsuch other person shall, subject to the provisions of sub-section (4) ofsection 25, each be assessed in respect of his actual share, if any, of theincome, profits and gains of the previous year :
Provided that, when the person succeeded in thebusiness, profession or vocation cannot be found, the assessment of the profitsthe year, in which the succession took place up to the date of succession, andfor the year preceding that year shall be made on the person succeeding him inlike manner and to the same amount as it would have been made on the personsucceeded or when the tax in respect of the assessment made for either of suchyears assessed on the person succeeded cannot be recovered from him, it shallbe payable by and recoverable from the person succeeding, and such person shallbe entitled to recover from the person succeeded the amount of any tax so paid.
19. A conspectus of the said sections discloses a clearcut scheme. Thoughincome-tax is only one tax levied on the total income, s. 6 enumerates sixheads whereunder the income of an assessee falls to be charged. This Court inUnited Commercial Bank Ltd. v. Commissioner of Income-tax, West Bengal : [1958]1SCR79 laid down that Sections 7 to 12 are mutually exclusive and where an itemof income falls specifically under one head it is to be charged under that headand no other. The expression 'income, profits and gains' in s. 6 is acomposite concept which takes in all the six heads of income mentioned therein.The 4th head is 'profits and gains of business, profession orvocation' and the 6th head is 'capital gains'. Section 10 taxesthe profits and gains of a business, profession or vocation carried on by anassessee; it also enumerates the different kinds of allowances that can be madein computing the profits. Under s. 10(1), as we have already pointed out, thenecessary condition for the application of the section is that the assesseeshould have carried on the business for some part of the accounting year.Section 26(2) indicates the manner of assessment of the income, profits andgains of any business, profession or vocation. This section does not providefor the assessment of income under any other head. It only says that if thereis a succession to a person carrying on business during an accounting year, theperson succeeded and the person succeeding can each of them be assessed inrespect of his actual share. The proviso deals with a case where the personsucceeded cannot be found; in that event, the assessment of the profits of theyear in which the succession took place upto the date of the succession and forthe year preceding that year shall be made on the person succeeding him. If anassessment has already been made in respect of the said years on the personsucceeded, it can be recovered from the person succeeding. But both sub-s. (2)and the proviso deal only with income, profits and gains of the business, thatis to say, for the assessment made in respect of profit and gains under the 4thhead of s. 6. Now turning to s. 12B, it provides for capital gains. Under thatsection the tax shall be payable by the assessee under the head capital gainsin respect of any profits or gains arising from the sale of a capital asseteffected during the prescribed period. It says further that such profits orgains shall be deemed to be income of the previous year in which the sale etc.took place. This deeming clause does not lift the capital gains from the 6thhead in s. 6 and place it under the 4th head. It only introduces a limitedfiction, named that capital gains accrued will be deemed to be income of theprevious year in which the sale was effected. The fiction does not make themthe profit or gains of the business. It is well settled that a legal fiction islimited to the purpose for which it is created and should not be extended beyondits legitimate field. Sub-sections (2A) and (2B) of s. 24 provide for thesetting off of the loss falling under the head 'capital gains'against any capital gains falling under the same head. Such loss cannot be setoff against an income falling under any different head. These three sectionsindicate beyond any doubt that the capital gains are separately computed inaccordance with the said provisions and they are not treated as the profitsfrom the business. The profits and gains of business and capital gains are twodistinct concepts in the Income-tax Act : the former arises from the activitywhich is called business and the latter accrues because capital assets aredisposed of at a value higher than what they cost the assessee. They are placedunder different heads; they are derived from different sources; and the incomeis computed under different methods. The fact that the capital gains areconnected with the capital assets of the business cannot make them the profitof the business. They are only deemed to be income of the previous year and notthe profit or gains arising from the business during that year.
20. If that be the scheme of the Act, the contention of the learned counselfor the Revenue can easily be answered. He asks that if s. 26(2) deals withonly profits and gains of the business, why should the Legislature use the word'income' therein As we have indicated, the expression 'income,profits and gains' is a compendious term to connote the income from thevarious sources mentioned in s. 6; therefore, the use of such an expressiondoes not efface the distinction between the different heads, but only describesthe income from the business. The expression 'profits' in the provisomakes it clear that the income, profits and gains in sub-s. (2) of s. 26 onlyrefer to the profits under the 4th head in s. 6. On the other hand, if theinterpretation sought to be put upon the expression 'income' insub-s. (2) of s. 26 by the Revenue is accepted, then the absence of that wordin the proviso destroys the argument. But the more reasonable view is that boththe sub-section and the proviso deal only with the profits under the 4th headmentioned in s. 6 and, so construed, it excludes capital gains. The argumentthat sub-s. (2) of s. 26 read with the proviso thereto indicates that the totalincome of the person succeeded is the criterion for separate assessment undersub-s. (2) and for assessment and realisation under the proviso is on theassumption that sub-s. (2) and the proviso deal with all the heads mentioned ins. 6 of the Act. But if, as we have held, the scope of sub-s. (2) of s. 26 isonly limited to the income from the business, the share under sub-s. (2) andthe assessment and realisation under the proviso can only relate to the incomefrom the business. The argument is really begging the question itself. In theresult we agree with the High Court in regard to the answer it has given inrespect of the second question.
21. In this view no other question arises for our consideration.
22. In the result, the appeal fails and is dismissed with costs.
23. Appeal dismissed.